Vanguard faces a lawsuit from the founders and other shareholders of JustInvest that stems from the asset manager’s 2021 acquisition of the direct indexing service, now operated as Vanguard Personalized Indexing Management.
The negligent misrepresentation complaint, filed last week in Delaware Chancery Court on behalf of JustInvest securityholders, including the company’s three founders, alleges that Vanguard Personalized Indexing and another Vanguard subsidiary acted in bad faith before and after the deal by making moves to restrain the business and post-closing earnings payouts.
These “performance payments” represented the majority of the consideration to be paid to JustInvest securityholders for the transaction, based on revenue targets, according to the lawsuit, which notes that the founders were the firm’s largest securityholders.
JustInvest, Vanguard’s first acquisition, had competing offers, according to the lawsuit, which accuses Vanguard of breaching the merger agreement.
The suit contends that Vanguard Personalized Indexing fired the fintech’s founders — Jonathan Hudacko, Vijay Rao and Alan Cummings — last year without cause and in retaliation for raising Vanguard’s alleged breaches and misconduct.
Among other claims, the lawsuit alleges that during merger negotiations, “Vanguard made material misrepresentations regarding its plans to support JustInvest’s business plan, including the amount of assets (and thus revenue) that Vanguard could bring to the JustInvest business and the assets that JustInvest would be allowed to retain or pursue.”
For example, the complaint alleges: "After JustInvest had successfully reached the final round of an opportunity ... for the onboarding of $900 million in assets onto the JustInvest asset management platform, Vanguard management blocked the deal by directing Vanguard salespersons to withdraw JustInvest’s offer of interest in managing the account, indicating only (without support or explanation) that it was not “strategic.”
A Vanguard representative didn’t immediately respond to an emailed request for comment.
Jeff DeMaso, Independent Vanguard Advisor editor, said he’s long wondered why Vanguard acquired the fintech, noting that the firms piloted a program before the deal but that “things went quiet” once it closed.
“Individual Vanguard investors can't access the service. And while direct indexing — now rebranded Personalized Indexing — is available to outside advisors, it's not part of Vanguard's Personal Advice offering. In other words, not even Vanguard’s in-house advisors are using it,” DeMaso wrote in his newsletter Monday. “I doubt that's what the Just Invest team expected when they signed on.”
The lawsuit won't affect the typical Vanguard investor but offers a window into Vanguard’s only acquisition and “will raise yellow (if not red) flags for anyone considering being the next,” he added.
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